Press Release

DBRS Morningstar Finalises Provisional Ratings on Red & Black Auto Italy S.r.l.

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November 09, 2021

DBRS Ratings GmbH (DBRS Morningstar) finalised its provisional ratings on the following classes of notes (the Rated Notes) issued by Red & Black Auto Italy S.r.l. (the Issuer):

-- Class A Notes at AA (high) (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at BBB (high) (sf)
-- Class D Notes at BB (high) (sf)

DBRS Morningstar did not assign ratings to the Class J Notes (together with the Rated Notes, the Notes) issued in this transaction.

The rating on the Class A Notes addresses the timely payment of interest and the ultimate repayment of principal by the final maturity date. The ratings on the Class B Notes, Class C Notes, and Class D Notes address the ultimate payment of interest and the ultimate repayment of principal by the final maturity date while junior to other outstanding classes of notes, but the timely payment of interest when they are the senior-most tranche, in accordance with the Issuer’s default definition provided in the transaction documents.

The Rated Notes are backed by a pool of approximately EUR 1 billion of fixed-rate receivables related to Italian auto loans granted by Fiditalia S.p.A. (Fiditalia or the Seller) to individuals residing in Italy. The proceeds of the Class J Notes fund the cash reserve.

DBRS Morningstar based its ratings on the following analytical considerations:
-- The transaction capital structure, including form and sufficiency of available credit enhancement.
-- Credit enhancement levels that are sufficient to support DBRS Morningstar’s projected expected net losses under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested.
-- Fiditalia’s capabilities with respect to originations, underwriting, servicing, and financial strength.
-- The appointment of a backup sub-servicer upon closing.
-- The transaction parties’ financial strength with regard to their respective roles.
-- The credit quality, diversification of the collateral, and historical and projected performance of the Seller’s portfolio.
-- The sovereign rating on the Republic of Italy, currently rated BBB (high) with a Stable trend by DBRS Morningstar.
-- The consistency of the transaction’s legal structure with DBRS Morningstar’s "Legal Criteria for European Structured Finance Transactions" methodology, and the presence of legal opinions that address the true sale of the assets to the Issuer.

TRANSACTION STRUCTURE
The transaction has a mixed sequential/pro rata amortisation structure. Initially, all collections from the receivables pay down the Class A Notes (in accordance with the relevant priority of payments). Once the Class A Notes support ratio percentage reaches 12%, principal on the Rated Notes will be allocated on a pro rata basis, unless specified performance triggers are breached as outlined in the transaction documents.

The transaction benefits from liquidity support provided by a cash reserve, funded to an amount equal to 0.5% of the initial principal amount of the Rated Notes. The reserve is available to cover the payment of senior expenses, swap payments, and nonsubordinated interest on the Rated Notes prior to being restored to its target amount equal to 0.5% of the outstanding principal balance of the Rated Notes, subject to a floor of 0.25% of their initial principal amount.

COUNTERPARTIES
The Bank of New York Mellon SA/NV, Milan branch (BNYM) is the account bank for the transaction. DBRS Morningstar has a private rating on BNYM, which meets DBRS Morningstar’s criteria to act in such capacity. The transaction documents contain downgrade provisions consistent with DBRS Morningstar’s criteria with respect to BNYM’s role as account bank.

The transaction is exposed to interest rate risk due to the mismatch between the fixed-rate assets and the floating-rate liabilities. The risk is mitigated by four different interest rate swap agreements for each of the Rated Notes. DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank) is the swap counterparty for the transaction. DBRS Morningstar has a Long-Term Senior Debt rating of AA (low) and a Long Term Critical Obligations Rating of AA on DZ Bank. The hedging documents include downgrade provisions consistent with DBRS Morningstar's criteria.

DBRS Morningstar analysed the transaction structure in Intex DealMaker.

CORONAVIRUS DISEASE (COVID-19) CONSIDERATIONS
The Coronavirus Disease (COVID-19) and the resulting isolation measures have caused an immediate economic contraction, leading in some cases to increases in unemployment rates and income reductions for many borrowers. DBRS Morningstar anticipates that delinquencies may continue to increase in the coming months for many asset-backed securities (ABS) transactions. The ratings are based on additional analysis to expected performance as a result of the global efforts to contain the spread of the coronavirus.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. These scenarios were last updated on 8 September 2021. DBRS Morningstar analysis considered impacts consistent with the baseline scenario in the below referenced report. For details, see the following commentaries: https://www.dbrsmorningstar.com/research/384150/baseline-macroeconomic-scenarios-for-rated-sovereigns and https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

On 2 November 2021, DBRS Morningstar updated its 8 May 2020 commentary outlining the impact of the coronavirus crisis on performance of DBRS Morningstar-rated auto ABS transactions in Europe. For more details, please see: https://www.dbrsmorningstar.com/research/387320/european-auto-abs-recovery-performance-update.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is “Rating European Consumer and Commercial Asset-Backed Securitisations” (29 October 2021).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings .

The sources of data and information used for the ratings include Fiditalia, provided through the transaction arranger, Société Générale, S.A.

DBRS Morningstar received the following data and information:
-- Static gross loss and recovery vintage from Q1 2013 to Q2 2021,
-- Dynamic delinquencies and originations from Q1 2013 to Q2 2021, and
-- Dynamic prepayments from Q1 2013 to Q1 2021.

DBRS Morningstar was also provided with detailed stratification tables and a loan-by-loan file as of 30 September 2021.
DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

These ratings concern newly issued financial instruments. These are the first DBRS Morningstar ratings on these financial instruments.

This is the first rating action since the Initial Rating Date.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the rating, DBRS Morningstar considered the following stress scenarios, as compared to the parameters used to determine the rating (the base case):
-- Expected Default Rate (PD): 2.2 % (excluding sovereign stress), a 25% and 50% increase on the applicable PD.
-- Recovery Rate: 25.0%.
-- Loss Given Default (LGD): 75.0%, a 25% and 50% increase in the applicable LGD.

Scenario 1: A 25% increase in the expected PD.
Scenario 2: A 50% increase in the expected PD.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected PD and 25% increase in the expected LGD.
Scenario 5: A 50% increase in the expected PD and 25% increase in the expected LGD.
Scenario 6: A 50% increase in the expected LGD.
Scenario 7: A 25% increase in the expected PD and 50% increase in the expected LGD.
Scenario 8: A 50% increase in the expected PD and 50% increase in the expected LGD.

DBRS Morningstar concludes that the expected ratings under the eight stress scenarios are:
-- Class A Notes: AA (sf), AA (low) (sf), AA (sf), A (high) (sf), A (low) (sf), AA (sf), A (high) (sf), A (low) (sf)
-- Class B Notes: AA (low) (sf), A (sf), A (low) (sf), BBB (high) (sf), BBB (high) (sf), A (low) (sf), BBB (high) (sf), BBB (high) (sf)
-- Class C Notes: BBB (high) (sf), BBB (high) (sf), BBB (low) (sf), BB (sf), BB (high) (sf), BBB (low) (sf), BB (sf), B (sf)
-- Class D Notes: BB (sf), B (high) (sf), B (high) (sf), B (low) (sf), below B(low) (sf), B (sf), below B(low) (sf), below B(low) (sf)

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Guglielmo Panizza, Assistant Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 28 September 2021
DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.

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